Financial Engines senior vice president of financial planning
2017 Investments Outlook: Terry Conner
Terry Conner uses his 25 years of industry experience to advise clients on investment planning and management for Financial Engines, which in 2016 bought his Springfield office of The Mutual Fund Store.
2017 Projection: While a diversified portfolio is still the best bet, investors may realize more gains from bank and small cap stocks under President-elect Donald Trump.
SBJ: What is the safest investment in 2017? Terry Conner: It really depends on what the investor sees as their goal and what their perceived outlook for the economy is. If I’m going to be intellectually honest with myself and with my clients, I have to admit one thing right off the bat: I, nor anybody else really knows what the future holds. As a recent indicator of that, just look at the election. Every poll in the nation had Hillary Clinton winning the presidency. Everybody predicted that if Trump was elected the margins would crater and instead they raced ahead to new highs. It really comes down to you need a plan and you need to be able to execute that plan based on having a diversified portfolio that reflects your risk tolerance. With that as a background, heading into 2017, “safe” really becomes safe from what? Short-term investments like Treasury bills and cash and CDs will protect you against volatility. Interest rates will probably remain very low even though the Federal Reserve has announced another small interest rate increase and has indicated that they plan to do that next year as well. A properly diversified mix of stocks and bonds will be your best and safest investment over the long run.
SBJ: What types of bonds? Conner: The bonds that have the greatest risk right now would be long-term Treasury bonds because they’re pure interest-rate risk. There’s an inverse relationship between interest rates and the value of a bond. If you own a 3 percent U.S. Treasury bond right now and interest rates rise and a new investor can get a 4 percent yield on a new bond a year from now, the value of your existing bond is going to fall. So, it’s like a teeter totter. If interest rates go up – which there tends to be a trend right now for that happening – the underlying value of existing bonds are going to fall in relation. The longer the term, like 30-year bonds, the more interest rate sensitive a bond is going to be. In shorter durations, there’s very little interest rate sensitivity because they mature very quickly.
SBJ: How will a Trump presidency affect the investment world? Conner: We have made changes in our client allocation models based on him being elected. He’s a pro-growth, pro-business president, and the markets both here and abroad frankly have been starved for that for a number of years. That coupled with a Republican Congress, we feel reasonably confident that he will get some of his initiatives passed. One of the things that has fairly broad bipartisan support is infrastructure spending. He’s proposed $1 trillion dollars in infrastructure spending in the first years of his presidency. We think that will be stimulatory toward the economy and probably will also bring with it a little more inflation, which frankly the Fed would like to see at this point.
SBJ: How will the stock market perform this year? Conner: I expect that changes will be made in monetary policies, and there’s probably going to be some fiscal policy changes. For example, Trump has indicated he wants to lower taxes both on a corporate and personal level, he wants to have less regulation, and he wants to spend some money on infrastructure. We think that will result in a low and falling inflation regime – that’s what we are now – to a low and rising inflation regime. The next year will probably show rising inflation but still low. That has a stimulatory effect on the economy. That means we’ve cut our exposure to international somewhat and we’ve raised our exposure to the U.S., specifically the small caps, which are less sensitive to interest rate increases.
SBJ: What types of stocks would you advise? Conner: Over the next couple years, we see small caps doing better and companies that are positioned to grow faster than the economy as a whole. Another potential winner has been and likely will be financial stocks. One of the things that Trump has talked about as a cornerstone of his proposed deal with America is less regulation. One of the beneficiaries of that will probably be banks and financial institutions. Looking for things that have not performed as well over the last 10 years or so – and certainly banks fit that model – that’s probably an area that will likely do better if his initiatives are enacted. Another sector that has not done well over the last couple of years has been health care. All things being equal, they may shine a little bit as they haven’t risen as much and they look a little more attractive on a valuation basis. We may have a lull for a few months. The market is probably a little overbought at this point. The preponderance of evidence is we’re not going to have a recession.